U.S. Insurance Regulators Issue Consumer Alert on Death Benefits
By David Evans and Hui-yong Yu
August 16, 2010
State insurance regulators, under pressure to improve disclosure of death-benefit payment options, issued a consumer alert about the industry practice of retaining funds rather than paying them in a lump sum.
"You may be able to earn a higher rate of interest on the life insurance proceeds if you select a different payout option," the National Association of Insurance Commissioners said in the alert. "While the documents you receive might look like a checkbook, it might actually be drafts, which are similar to checks, but different in some ways."
The alert was issued after an NAIC panel met yesterday in Seattle to review retained-asset accounts. The regulators created the panel after Bloomberg Markets magazine reported in July that insurers profit by holding and investing $28 billion owed to 1 million beneficiaries.
"Disclosure is paramount," said Thomas R. Sullivan, co- chair of the working group, at its first meeting yesterday. "That seems to be the central issue."
Retained-asset accounts let insurers keep proceeds of a life insurance policy in their general corporate accounts, earning investment income, while providing the beneficiary with a checkbook-like account that's not insured by the Federal Deposit Insurance Corp. The NAIC heard testimony from Peter Gallanis of the National Organization of Life & Health Insurance Guaranty Associations that the accounts are covered by state insurance backstops. While beneficiaries can draw drafts on the funds, they don't always clear as easily as checks.
In its alert, the NAIC suggested consumers consider options besides keeping benefits in an interest-bearing account at the insurer. It also urged consumers to ask what interest rate they will get, what fees may be charged and what will guarantee funds if the insurer fails.
Improving disclosure is a better way to protect consumers than passing new laws, said Sullivan, Connecticut's insurance commissioner.
FDIC Chairman Sheila Bair voiced "serious concerns" that consumers may mistakenly think the accounts are insured by the FDIC in an Aug. 5 letter to the NAIC. New York Attorney General Andrew Cuomo has opened a fraud probe and subpoenaed insurers including MetLife Inc. and Prudential Financial Inc.
The growth of retained-asset accounts necessitates improved disclosure about the products, said Peter Kochenburger, a University of Connecticut law professor and NAIC-appointed consumer advocate who spoke before the working group. "The last NAIC bulletin is 16 years old. It's very general."
Bill of Rights
Only six states have issued clear consumer protections on retained-asset accounts, according to Kentucky State Representative Robert Damron, president of the National Conference of Insurance Legislators.
He is urging states to pass what he calls a beneficiary's bill of rights requiring that insurers only use retained-asset accounts for consumers who request them. Firms would also be forced to disclose how interest rates are determined, how funds are invested and any service fees.
"Allowing the life insurance companies to default to retained-asset accounts is just not acceptable," said Damron after yesterday's meeting. "How any consumer advocate, which is what an insurance commissioner is supposed to be, could allow a default to an RAA raises serious concerns in my mind about who is protecting who."
Representatives of MetLife and Newark, New Jersey-based Prudential, the two largest U.S. life insurers, told the NAIC panel they provide ample disclosure to consumers explaining retained-asset accounts and give policyholders and beneficiaries the choice of a lump-sum payment. About 60 percent of customers close out their accounts within a year, the officials said.
Disclosures about retained-asset accounts "have evolved over the years," said Bernard Winograd, executive vice president and chief operating officer of Prudential's U.S.-based businesses. "It's a balancing act between legal requirements and what the consumer can understand."
Many customers choose the accounts, which offer safety and time to grieve, he said. "Checks have a tendency to get lost" and receiving a large lump-sum payment can leave beneficiaries "subject to predators," he said. "My only worry is we go back to a system where we force checks on people not prepared to accept them."
MetLife's disclosure documents for its so-called Total Control Account are "thorough, clear and easy to understand," said Todd Katz, executive vice president of U.S. business at the New York-based insurer.
The accounts pay a minimum guaranteed interest rate of 3 percent, 1.5 percent or 0.5 percent, depending on when they were opened, he said. MetLife has 485,000 retained-asset accounts. "In today's interest-rate environment, we believe this is an exceptional consumer value," Katz said.
"To be sure, TCA accounts are also good for MetLife," which aims to grow assets, he said. "Nothing here is secret. We do make a profit on TCA."
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